Rishi Sunak's UK Spring Statement

Harold Macmillan reportedly said that the greatest challenge for a politician was ‘Events, dear boy, events'.  Rishi Sunak must feel that in spades. Having been appointed as Chancellor in February 2020, within weeks the country went into lockdown.

Now with the country officially ‘living with covid’, and Brexit in the rear view mirror, he might have been forgiven for thinking that he would have an opportunity to set out his ideology and explain what Sunakism means.  A useful signpost in his pitch for the top job, perhaps?  Instead he faces the worst cost of living crisis since Nigel Lawson and a major war in Europe for the first time in a generation.

Notwithstanding these conspicuous headwinds blowing him off course, with the release of a personally signed ‘Tax Plan’ the Chancellor sought to set out what being a low tax Tory means in the current environment.

Spending

The Chancellor made a handful of spending pledges intended to soften the blow of the dramatic jump in energy prices and 30-year high inflation (announced yesterday to have reached 6.2% last month, with the OBR forecasting an average 7.4% for the year).

The Chancellor’s first measure is a cut in fuel duty of 5p per litre for twelve months. Next, he will reduce VAT to zero on the installation of energy saving materials for one’s home, such as solar panels, heat pumps and insulation. Finally he will increase the Household Support Fund, a sum set aside to support the households most in need with food, energy, water bills and other essential costs.

The Chancellor also announced a £9bn package to help 28 million households pay around half of the April increase in the energy price cap.

Given the context of the Statement, these announcements were politically somewhat inevitable. The tax promises, by contrast, were less so.

Taxation

In keeping with the tone of his Autumn Budget last year, the Chancellor announced measures to tackle what he identified as a productivity and innovation gap between the UK and some of its competitor economies. Much of this was a recap of pledges announced in the Autumn Budget, with the addition of a review and reform of the R&D tax credits system. The government resisted pressure to implement any kind of windfall tax on, for example, energy companies to help deal with price increases for consumers.

Significantly, Mr Sunak will equalise the thresholds at which income tax and National Insurance Contributions start, meaning there will be no income tax or NI to pay on the first £12,570 that a taxpayer earns. It was claimed that for most taxpayers this cut in NI would exceed the rate increase announced in the Autumn Budget in the form of the health and social care levy.

The big question before the statement was whether the Chancellor would roll-back the new Health and Social Care levy announced last year. In the end, he faced down the political pressure which had built, but instead opted to give with one hand what he had taken with the other and the big announcement of the day was billed as an historic tax cut – a reduction in the basic rate of income tax from 20% to 19%.

In keeping with recent pronouncements, taxpayers will have to wait to see this as it is scheduled to come in only from 6 April 2024. This is less than a month before the currently scheduled general election on 2 May 2024, when the cut to the basic rate will be fresh in the memory of voters. There is of course plenty of time for the Chancellor to tweak the rest of the system of personal taxation in the interim so the actual benefit of this to taxpayers will remain to be seen.

While basic rate taxpayers may welcome a reduction in their tax bills, the freezing of the basic and higher rate thresholds until 2025 will drag many taxpayers into higher rates of tax, especially in a time of high inflation.

A reduction in the basic rate of tax will be a hit to charities, which make a significant amount of their income through Gift Aid. With less tax to claim back on charitable donations, the amount of their Gift Aid income will be reduced by 5%, albeit the effect of this will be delayed until 2027.

In the lead up to the Statement, some commentators wondered whether any of the Chancellor’s less welcome Autumn announcements could be scrapped. The headline rate of corporation tax is however still set to climb to 25% (from 19%) from April next year, in a further hit for battered businesses.

This Statement was a cautious one. The Chancellor may say that he believes in lower taxes but he does not seem to have any desire to change the fundamentals of the tax system, or to shift where the burden of taxation falls. The prospect of increases to the rate of capital gains tax, or the reform of inheritance tax, seem very remote at this stage. Remember the non-doms, whose tax position was a key battleground of the 2015 General Election? The Chancellor seems not to. Instead, he opted for relatively minor tinkering to the tax system, offsetting tax cuts with tax increases and frozen allowances. The wider stability this provides may be a good thing for beleaguered taxpayers who have grappled with successive changes over many years to an already complex regime.

Perhaps when the circumstances are more favourable and inflation has stabilised, we will see a more radical approach from this self-confessed low tax Chancellor. For now though, radical change is in short supply.